Opinion
NOT TO BE PUBLISHED
Superior Court County of Ventura, No. SC044181, Glen M. Reiser, Judge.
Law Offices of Ray B. Bowen, Jr., Ray B. Bowen, Jr. for Plaintiff and Appellant.
Semper Law Group, LLP, Leonard M. Tavera for Defendant and Respondent.
GILBERT, P.J.
Plaintiff Asphalt Professionals, Inc. (API) appeals a summary judgment granted in favor of defendant Stephen Bock. API sued Bock claiming that T.O. IX, a limited liability company, was Bock's alter ego, and that T.O. IX breached a construction contract and did not pay API for construction work it performed on a housing development project. The trial court ruled there was no evidence supporting liability against Bock under the alter ego doctrine. We conclude, among other things, that API presented evidence to establish triable issues of fact that support the inference that T.O. IX was Bock's alter ego. We reverse and remand.
FACTS
In 2004, API signed a construction contract with T.O. IX, a limited liability company (LLC). In the contract, T.O. IX is listed as the "owner/builder" of a new housing development project. API was the subcontractor that agreed to perform asphalt and concrete street improvement services for the project.
During construction, there were a number of modifications or "change orders" to the original contract. The instructions and communications relating to the changes API had to implement came from D and S Homes, Inc. (D and S Homes), a small corporation started by Bock and his partner Darin Davis. Bock and Davis had been partners in the construction business. Together they owned a 56 percent share of D and S Homes. D and S Homes owned a 60 percent share of T.O. IX.
On August 11, 2005, D and S Homes gave notice to API that it had violated provisions of the original 2004 construction contract. In that letter, D and S Homes referred to that 2004 agreement as "our contract, " and it warned API that it had "no option... but to terminate" the contract. In that termination notice, there was no mention of T.O. IX. The letter was signed by Davis as the president of D and S Homes.
API sued T.O. IX, Bock, Davis, D and S Homes, and other defendants for breach of contract and fraud. It claimed that it had not been compensated for the street improvements it made for the project. It alleged that T.O. IX was "a mere shell and sham without capital, assets, stock, stockholders, membership interests or members, " and that Bock and Davis used T.O. IX as a "device" for "the purpose of substituting a financially insolvent" company to be responsible for the unpaid construction debts owed to API and to shield Bock and Davis from liability. API also claimed that Bock and his company Real Estate Spectrum Inc. (Real Estate Spectrum) had taken assets from T.O. IX "for their personal use."
Bock moved for summary judgment. He claimed that he could not be liable for breaching the construction contract because the only parties to that agreement were API and T.O. IX. Bock admitted that he was "an officer of T.O. IX."
The trial court granted summary judgment in favor of Bock. It ruled that API had not shown a sufficient "nexus" between Bock, the construction contract and T.O. IX. It said there was no "triable alter ego claim" as to Bock The court, however, denied the summary judgment motion of Bock's partner, Davis. It said, "Just as one entity can be deemed the alter ego of another, so can the individual who controls the web of entities be deemed the alter ego of all of them, or at least some of them. There are alter ego factual issues as to Davis."
DISCUSSION
Summary Judgment
API contends the trial court erred by granting summary judgment because there was a triable issue of fact regarding whether T.O. IX was Bock's alter ego.
"The purpose of the law of summary judgment is to provide courts with a mechanism to cut through the parties' pleadings in order to determine whether, despite their allegations, trial is in fact necessary to resolve their dispute." (Aguilar v. AtlanticRichfield Co. (2001) 25 Cal.4th 826, 843.) "On appeal, we conduct a de novo review of the record to 'determine with respect to each cause of action whether the defendant seeking summary judgment has conclusively negated a necessary element of the plaintiff's case, or has demonstrated that under no hypothesis is there a material issue of fact that requires the process of trial....'" (Zoran Corp. v. Chen (2010) 185 Cal.App.4th 799, 805.)
Summary judgment "''is a drastic measure which should be used with caution so that it does not become a substitute for trial."'" (Zoran Corp.v. Chen, supra, 185 Cal.App.4th at p. 806.) "Consequently, '[i]n performing our de novo review, we must view the evidence in a light favorable to plaintiff as the losing party..., liberally construing [its] evidentiary submission while strictly scrutinizing defendants' own showing....'" (Ibid.) "'We need not defer to the trial court and are not bound by the reasons for the summary judgment ruling....'" (Ibid.)
The Alter Ego Doctrine
"The alter ego doctrine arises when a plaintiff comes into court claiming that an opposing party is using the corporate form unjustly and in derogation of plaintiff's interests." (Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300.) Where shareholders abuse the corporate structure, it may be "disregarded and the corporation looked at as a collection or association of individuals" who are "liable for acts done in the name of the corporation." (Ibid.)
"There is no litmus test to determine when the corporate veil will be pierced; rather the result will depend on the circumstances of each particular case." (Mesler v. Bragg Management Co., supra, 39 Cal.3d at p. 300.) "There are, nevertheless, two general requirements: '(1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.'" (Ibid.)
Several factors may be relevant in determining whether business entities are alter egos of individuals. These include whether the company was used as an undercapitalized "shell" to conduct business for individuals who dominated and controlled it to shield them from liability for their actions. (Zoran Corp. v. Chen, supra, 185 Cal.App.4th at p. 811; id. at pp. 812-813.) An alter ego status also may be shown by "the disregard of legal formalities and the failure to maintain arm's length relationships" between the entities and the individuals. (Id. at pp. 811-812.) Other factors may include failing to segregate the funds of the separate entities, diverting corporate assets for the benefit of individual shareholders, using the same employees for the different entities, and the lack of any independent and separate corporate management structure. There are numerous other factors that may be considered. "'No single factor is determinative, and instead a court must examine all the circumstances to determine whether to apply the doctrine.'" (Id. at p. 812.)
In its complaint, API alleged that T.O. IX, a LLC, was "a mere shell and sham without capital" and assets, and it was used by Bock as an alter ego to avoid his "individual liability" for his actions. A LLC "'is a hybrid business entity that combines aspects of both a partnership and a corporation.'" (Warburton/Buttner v. Superior Court (2002) 103 Cal.App.4th 1170, 1187.) "'"A member of a limited liability company shall be subject to liability under the common law governing alter ego liability...."'" (Id. at p. 1188.)
Trial Court's Consideration of the Complete Record
In its tentative ruling granting summary judgment, the trial court said, "Moving Party Bock is the CEO of D and S Homes, Inc.... And while Plaintiff contends that Bock is the alter ego of one or more of the relevant entities, if there was any 'unity of interest' between Bock and the relevant actors or entities, one would think that Plaintiff could point to a single act or statement of Bock [to] have some correlation to the relevant facts of this construction dispute, the underlying contract, the property, or TO IX itself. Plaintiff submits no such nexus, other than Bock's purported 28% interest in the shares of D and S Homes, Inc., which in turn held an asserted 60% interest in TO IX. A minority ownership interest, standing alone, does not give rise to a triable alter ego claim." The court subsequently adopted its tentative as its final order.
Before the trial court made its final ruling, API filed a supplement to its summary judgment opposition, which included a declaration by attorney Ray Bowen, other declarations and transcripts of depositions. API contends the court erred because it did not read these documents which established triable issues of fact on the alter ego issue. Bock responds that the court was justified in not considering the depositions because API did not comply with the Rules of Court. He claims API failed to highlight the portions of the depositions it relied on.
The parties' contentions that the trial court did not consider API's supplement to its summary judgment opposition are without merit. At the hearing the court stated, "I have reviewed the additional materials that [API] has filed." It mentioned that portions of the depositions should have been highlighted "with a yellow marker." (See Cal. Rules of Court, rule 3.1116(c) ["The relevant portion of any testimony in the deposition must be marked in a manner that calls attention to the testimony"].) But the court did not say that it was excluding them from consideration because of this technical omission. API had cited to the specific pages and lines of the deposition testimony it was relying on. Consequently, the court was directed to the relevant testimony, even though the lines of that testimony were not highlighted by a yellow marker. Summary judgment based solely on a plaintiff's procedural mistake is disfavored where the evidence in the record supports a triable issue of fact. (Leep v. American Ship Management, LLC (2005) 126 Cal.App.4th 1028, 1039-1040.)
Bock claims the trial court did not abuse its discretion. But that is not the standard on appeal. We make a de novo review on appeals from summary judgments and we are not bound by the trial court's rulings. (Zoran Corp. v. Chen, supra, 185 Cal.App.4th at p. 806.) We independently determine from the entire record whether there are triable issues of fact. (Ibid.)
Triable Issues of Fact
API claims it met its burden to show that there were triable issues of fact about whether T.O. IX was Bock's alter ego. We agree.
API presented evidence of factors supporting reasonable inferences of alter ego liability, including: 1) the construction contract did not accurately reflect T.O. IX's role as a builder, and that other entities were actually building the project; 2) Bock and Davis had interlocking control over those entities; 3) T.O. IX was undercapitalized; 4) T.O. IX was not functioning as an independent company; 5) Bock and Davis directly controlled T.O IX, a LLC; 6) Bock and Davis had a pattern of using LLC's as temporary entities on construction projects; 7) employees of entities controlled by Bock and Davis were used interchangeably; 8) companies controlled by Bock and Davis lacked independent financial accountability; and 9) there was evidence that company assets were being used for the personal benefit of shareholders.
Facts T.O. IX Did Not Disclose in the Construction Contract
API presented evidence showing that despite the language of the construction contract, T.O. IX was not the actual builder of the housing project. In his declaration, Bowen said that API contracted with T.O. IX, but it later discovered that it was "actually doing business" with D and S Homes and Real Estate Spectrum. But these two entities were not mentioned in the construction contract. This supports a reasonable inference that T.O. IX did not disclose to API the entities actually involved in the construction project.
In his declaration, Eric Younger, a retired judge, said the 2004 construction contract between API and T.O. IX was unusual for two reasons: 1) T.O. IX is identified as an owner/builder, but it had no duties under this agreement, and 2) the real contract is essentially between API, the subcontractor, and a contractor that is never named. But the identity of the moving force would soon become clear. The communications relating to the contract modifications came from D and S Homes, not from T.O. IX. The contract termination notice also came from D and S Homes. In that August 11th letter, D and S Homes referred to the 2004 construction contract as "our contract, " not as T.O. IX's contract. A reasonable inference is that this contract was created largely for the benefit of D and S Homes. The T.O. IX project manager testified in her deposition that she used D and S Homes' letterheads for this project because D and S Homes was the entity building this project.
Bock's and Davis's Interlocking Control Over the Construction Entities
A major task in deciding alter ego status is determining the persons "actually controlling" the alter ego entities. (Sonora Diamond Corp.v. Superior Court (2000) 83 Cal.App.4th 523, 538.) API presented evidence showing that Bock and Davis had that control. Bock and Davis were partners in the construction business and were the officers of a LLC called D and S Development, LLC. They closed it and incorporated it as D and S Homes. D and S Homes owns 60 percent of T.O. IX, a LLC, and Bock and Davis own 56 percent of D and S Homes. Bock is the CEO of D and S Homes and also a T.O. IX officer. Davis is the president of T.O. IX, and he is the person who signed the contract with API. Bock owns a 76 percent share of Real Estate Spectrum, and he is the president of that entity. D and S Homes and Real Estate Spectrum paid individuals affiliated with T.O. IX. Bock's and Davis's interlocking connections with, and control over, these entities are substantial.
The Undercapitalization of T.O. IX
API presented facts showing that T.O. IX was not a financially viable entity. Although T.O. IX was listed as the "owner/builder, " it lacked the financial resources to be an independent business.
In his deposition, James Paules, a financial officer familiar with the financial records, testified that T.O. IX had "no money." Consequently, D and S Homes paid its bills. T.O. IX's act of initiating a construction project with insufficient financial resources is evidence calling into question its legitimacy as a valid business entity. "'[T]he attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity....'" (Claremont PressPub. Co. v. Barksdale (1960) 187 Cal.App.2d 813, 816.) T.O. IX's "undercapitalization" is a factor supporting API's claim that it is an alter ego "shell" used for the benefit of another entity or person. (Zoran Corp. v.Chen, supra, 185 Cal.App.4th at p. 811.)
T.O. IX's Functional Incapacity
A company's functional capacity is a relevant factor in determining alter ego status. (Zoran Corp. v. Chen, supra, 185 Cal.App.4th at p. 811.) Here T.O. IX was listed as the builder, but it did not have a contractor's license. The Contractors State License Board (CSLB) cited it for contracting without a license and ordered it to cease contracting operations.
In his deposition, Davis admitted that his "contractor's license number was used to pull the permits for the T.O. IX project." In her deposition, Jeannie Church, the T.O IX project manager, testified that she used the D and S Homes' contractor's license number on all building projects. T.O. IX could not sign a construction contract and represent that it had the authority to act as the "builder, " when it did not have a contractor's license. (Lewis &Queen v. N.M. Ball Sons (1957) 48 Cal.2d 141, 146-148.) This supports API's claim that T.O. IX was not a legitimate entity.
Bock's and Davis's Direct Control Over T.O. IX
API presented evidence showing that Bock and Davis dominated T.O. IX because Bock and David had: 1) the T.O. IX legal authority, because they were T.O. IX company officers; 2) the financial control, because they controlled D and S Homes the majority shareholder of T.O. IX; and 3) the operational control, because decisions on all project operations had to be approved by them. The T.O. IX project manager, Church, had a title, but she lacked independent authority. She could deliver building plans to the city, but she could not draft or modify them because she was not a licensed contractor. She testified that she could not "make a final decision about anything"; she first had to obtain approval from Bock and Davis. Her management role was so limited that she said she was "not expected to review or analyze or comment or anything...." The information for T.O. IX's communications with subcontractors was provided to her by Bock and Davis. Church had no authority to negotiate with buyers. She lacked authority to resolve disputes. She testified that if there was a complaint by a homeowner "it was ultimately up to" Bock and Davis "what I could or couldn't do." She received paychecks from D and S Homes. She believed that Bock and Davis owned D and S Homes, and that consequently their company owned T.O. IX.
The trial court found that because of the evidence of Davis's control, there was a triable issue of fact as to whether T.O. IX was Davis's alter ego. The court ruled, however, that that did not apply to Bock. But Bock and Davis were partners. The evidence API presented supports reasonable inferences that Bock and Davis jointly exercised control over T.O. IX. Church's testimony indicates that she looked to both Bock and Davis before taking action.
Pattern of Using LLC's as Temporary Entities
In his declaration, Steven Gerjets, a construction industry expert, said that Bock and Davis, as partners, used LLC's on their construction projects and had created a "web of entities." He said Davis told an agent of the CSLB that D and S Homes would be a "managing" member of "every LLC" in order to protect D and S Homes' assets in case of litigation. Gerjets said Bock had a special motive to use these companies on construction jobs. Bock had been disciplined by the CSLB for contracting without a license. Gerjets suggested that by directing these entities, Bock could do indirectly what he could not do directly contract without a license, using LLC's as shields.
In a report by a CSLB investigator, Davis is reported as saying that the LLC's he and Bock used for construction projects were only temporary entities that he and Bock would disband after the completion of the project. Davis said, "[O]nce a project is completed, we distribute the remaining funds, then close out the LLC. It usually takes about a year to wrap up the job then the LLC will go away. We have been doing this forabout 4 or 5 years." (Italics added.)
This business practice is highly probative in evaluating Bock's and Davis's actions in this case. (Evid. Code, § 1105; Webb v. Van Noort (1966) 239 Cal.App.2d 472, 477-478.) There is a triable issue of fact as to: 1) whether T.O. IX, LLC fell within the Bock and Davis practice of using LLC's as disposable entities, and 2) whether T.O. IX was merely an alter ego "conduit for a single venture." (Zoran Corp. v. Chen, supra, 185 Cal.App.4th at p. 811; Pan Pacific Sash & Door Co. v. Greendale Park, Inc. (1958) 166 Cal.App.2d 652, 658.)
Interchangeable Employees
There is evidence supporting API's claim that employees of the companies controlled by Bock and Davis were being used interchangeably. This is another factor that supports an alter ego claim. (Zoran Corp. v. Chen, supra, 185 Cal.App.4th at p. 811.) The T.O. IX project manager was a D and S Homes' employee. While working on the T.O. IX project, she was required to use either D and S Homes' stationary or letterheads with the D and S Homes' heading. When she finished the T.O. IX project, she continued to be a D and S Homes' employee working on other projects. A reasonable inference is that she was accountable exclusively to Bock and Davis because T.O. IX had no separate and independent management structure. Paules testified that Real Estate Spectrum employees initially received their paychecks from that entity, but later they received them from D and S Homes. Paules said he had a job offer from D and S Homes, but his W-2 form showed "Real Estate Spectrum as the employer." Bock controlled Real Estate Spectrum.
Lack of Independent Financial Accountability
API claimed that companies controlled by Bock and Davis lacked independent financial accountability, and there is some evidence to support that contention. T.O. IX was financially dependent on D and S Homes. Paules testified that Real Estate Spectrum was not "reimbursed" for services it provided to D and S Homes.
API noted that: 1) if these entities were truly separate and independent, there would have been a bill for reimbursement; and 2) its absence shows that the independence of these entities was not relevant because the real beneficiaries were Bock and Davis, not the entities. Although not conclusive, the evidence on this issue is sufficient to raise a triable issue of fact.
Using Company Assets for the Personal Benefit of Shareholders
API cited to evidence that suggested that entities controlled by Bock and Davis were operating for the personal benefit of a small group of shareholders. Bowen stated in his declaration that D and S Homes used corporate assets to pay for personal automobiles for Bock and Davis. It paid monthly auto payments for Davis. Bowen noted that deposition testimony confirms that it also paid $30,000 to Cormier Chevrolet to buy a "new Corvette" for Jose Leon, a shareholder.
Using corporate assets to pay for luxury automobiles for shareholders is not a normal expense for a construction company. Bock, Davis and D and S Homes may be able to justify these expenses at trial. But for summary judgment purposes, the evidence API presented supported sufficient inferences to show that there was a "failure to maintain arm's length relationships" between the entities and the individuals. (Zoran Corp. v. Chen, supra, 185 Cal.App.4th at p. 811.)
We conclude that API met its burden to establish triable issues of fact.
Because we have concluded that there are triable issues of fact based on the record before the trial court, it is unnecessary for us to decide API's January 24, 2011 motion to augment or add new evidence on appeal.
The judgment is reversed and the matter is remanded to the trial court. Costs on appeal are awarded in favor of appellant.
We concur: YEGAN, J., PERREN, J.